McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

reserved.

Chapter 1: What Is Strategy

and Why Is It Important?

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University

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Chapter Learning Objectives

1. Understand the role of business strategies in moving a

company in the intended direction, growing its business,

and improving its financial and market performance.

2. Develop an awareness of the four most reliablestrategic

approaches for setting a company apart from rivals and

winning a sustainable competitive advantage.

3. Learn that business strategies evolve over time because

of changing circumstances and ongoing management

efforts to improve the company’s strategy.

4. Understand why a company’s strategy must underpinned

by a business model that produces revenues sufficient to

cover costs and earn a profit.

5. Gain awareness of the three tests that distinguish a

winning strategy from a so-so or flawed strategy.

6. Learn why good strategy and good strategy execution are

the most trustworthy signs of good management.

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Chapter Roadmap

What Do We Mean by “Strategy?”

Strategy and the Quest for Competitive Advantage

Identifying a Company’s Strategy

Why a Company’s Strategy Evolves Over Time

A Company’s Strategy Is Partly Proactive and

Partly Reactive

Strategy and Ethics: Passing the Test of Moral

Scrutiny

The Relationship Between a Company’s Strategy

and Its Business Model

What Makes a Strategy a Winner?

Why Are Crafting and Executing Strategy

Important?

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Strategy to them are :

Jack Welch, Former CEO, General Electric

Strategy means making clear-cut choices about

how to compete

Sharon Oster, Professor, Yale Uninersity

A strategy is a commitment to undertake one set

of actions rather than another

Joel Ross and Michael Kami

Without a strategy the organization is like a ship

without a rudder

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Thinking Strategically:The Three Big Strategic Questions

1. What’s the company’s present situation?

2. Where does the company need to go from

here?

Business(es) to be in and market positions to

stake out

Buyer needs and groups to serve

Direction to head

3. How should it get there?

A company’s answer to “how

will we get there?” is its strategy

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What Do We Mean By “Strategy?”

Consists of competitive moves and

business approaches used by managers to

run the company

Management’s “action plan” to

Grow the business

Attract and please customers

Compete successfully

Conduct operations

Achieve the targeted levels of

organizational performance

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The Hows That Define a Firm's Strategy

How to grow the business

How to please customers

How to outcompete rivals

How to manage each functional

piece of the business (R&D, production,

marketing, HR, finance, and so on)

How to respond to changing market

conditions

How to achieve targeted levels of

performance

Strategyis HOWto . . .

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Choosing the “Hows” of Strategy

Strategic choices about “how” are based on

Trial-and-error organizational learning about what has

worked and what has not worked

Management’s appetite for taking risks

Managerial analysis and strategic thinking about how best

to proceed, given market conditions and a company’s

circumstances

In choosing a strategy, management is in effect

saying,

“Among all the many different ways of competing we could

have chosen, we have decided to employ this combination

of competitive and operating approaches to move the

company in the intended direction, strengthen its market

position and competitiveness, and boost performance.”

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Key Elements of a Successful Strategy

Developing a successful strategy hinges on

making competitive moves aimed at

Appealing to buyers in ways to set the company

apart from rivals and

Carving out its own market position

Involves developing a distinctive “aha”

element to

Attract customers and

Produce a competitive edge

Copying competitive moves of other

successful companies rarely works!

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Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are actions a

company makes to

Improve its financial performance,

Strengthen its competitive position, and

Gain a competitive advantage over rivals

A creative, distinctive strategy that sets a

company apart from rivals and yields a competitive

advantage is a company’s most reliable ticket to

above average profitability

Operating with a competitive advantage is more profitable

than operating without one

Operating with a competitive disadvantage nearly always

results in below-average profitability

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A Powerful Strategy Leads to Sustainable Competitive Advantage

A company achieves sustainable competitive

advantage when An attractive number of buyers prefer its

products/services over those of rivals and

The basis for this preference is durable

Its nice when a strategy produces A temporary competitive edge but

A sustainable edge over rivals greatly enhances a

company’s prospects for above-average profitability

What separates a powerful strategy from an ordinary

strategy is management’s ability to forge a series of

moves, both in the marketplace and internally, that

produces sustainable competitive advantage!

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Strategic Approaches to Building Sustainable Competitive Advantage

Be the industry’s low-cost provider

Achieve a cost-based competitive advantage

Incorporate differentiating features

Superior product/service keyed to higher quality,

better performance, wider selection, value-added

services, or some other attribute

Focus on a narrow market niche

Win a competitive edge by doing a

better job than rivals of serving the

needs and preferences of buyers in the niche

Develop expertise and resource strengths

not easily imitated or matched by rivals

Achieve a capabilities-based competitive advantage

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Illustration Capsule 1.1

Starbucks’ Strategy in the Specialty Coffee

Industry

Expand the number of Starbucks Stores

domestically by blanketing metropolitan

areas, then adding stores on the city’s

perimeter

Make Starbucks a global brand by opening

stores in an increasing number of foreign

locations

View each store as a billboard for the

company and as a contributor tobuilding the

company’s brand and image

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Illustration Capsule 1.1

Broaden in-store product offering

Fully exploit the growing power of the

Starbucks name and brand image with out-

of-store sales

Display corporate responsibility and

environmental sustainability

Controlthe costs of opening new stores

Promote customer-friendly service and

enhance store ambience by making

Starbucks a great place to work

Figure 1.1: Identifying a Company’s Strategy

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Why Do Strategies Evolve?

A company’s strategy is a work in progress

Changes may be necessary to react to

Financial crisis

Fresh moves of competitors

Evolving customer preferences

Technological breakthroughs

Emerging market opportunities

Changing political or economic climate

New ideas to improve strategy

Figure 1.2: A Company’s Strategy Is a Blend ofProactive Initiatives and Reactive Adjustments

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Linking Strategy With Ethics

Ethical and moral standards go beyond

Prohibitions of law and language of “thou shalt

not”

to issues of

Duty and “right” vs. “wrong”

Ethical and moral standards address

“What is the right thing to do?”

Two criteria of an ethical strategy Does not entail actions and behaviors that cross the line

from “should do” to “should not do” (because such

actions are unsavory, shady, unconscionable, injurious

to others, or harmful to the environment)

Allows management to fulfill its ethical duties to all

stakeholders

A Firm’s Ethical Responsibilitiesto Its Stakeholders

Owners/shareholders – Rightfully expect some form of return on their investment

Employees – Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Customers – Rightfully expect a seller to provide them with a reliable, safe product or service

Suppliers – Rightfully expect to have an equitable relationship with firms they supply and be treated fairly

Community – Rightfully expect businesses to be good citizens in their community

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Role of Senior Executives:Linking Strategy with Ethics

Forbid pursuit of ethically questionable business

opportunities

Insist all aspects of company strategy

reflect high ethical standards

Make it clear that all employees are

expected to act with integrity

Install organizational checks and balances to

Monitor behavior

Enforce ethical codes of conduct

Provide guidance to employees in gray areas

Display genuine commitment to conduct

business activities ethically

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Illustration Capsule 1.2

Microsoft and Red Hat : two contrasting business

models

Microsoft :

Employ a cadre of highly skilled programmers to

develop proprietary code, keep the source code

hidden

Sell the resulting operating system and software

package to personal computer (PC) makers and PC

users at attractive price

Keep costs on the front end (in developping the

software) fixed, set variable costs of producing and

packaging the CDs provided to users at only a

couple of dollars per copy

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Illustration Capsule 1.2

Provide a modest level of technical support to users

at no cost

Keep rejuvenating revenues by periodically

introducing next-generation software version

Red Hat

Rely on the collaborative efforts of volunteer

programmer all over the world

Collect and test enhancement and new applications

submitted by the open-source community

Market the upgraded and tested family of Red Hat

Linux to large enterprices and charge the

subscription fee

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Illustration Capsule 1.2

Make source code open and available to all

users, allowing them to create customized

version of Linux

Capitalize on the specialized expertise

required to use Linux in multiserver,

multiprocessor application by providing fees-

based training, consulting, software

customization, and client-directed

engineering to Red Hat Linux users

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What Is a Business Model?

A business model addresses “How do we

make money in this business?”

Is the company’s strategy capable of delivering

good bottom-line results?

Do the revenue-cost-profit economics

of the strategy make good business sense?

Look at revenue streams the

strategy is expected to produce

Look at associated cost structure

and potential profit margins

Do resulting earnings streams and ROI indicate the

strategy has good potential to deliver acceptable

profitability?

Relationship Between Strategy and Business Model

Strategy . . .

Deals with a company’s

competitive initiatives and

business approaches

Business Model . . .Concerns whether revenues

and costs flowing from the

strategy demonstrate a

business can be profitable

and viable

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Tests of a Winning Strategy

GOODNESS OF FIT TEST

How well does the strategy fit

the company’s external and

internal situation?

COMPETITIVE ADVANTAGE TEST

Is the strategy helping the company achieve a

sustainable competitive advantage?

PERFORMANCE TEST

Is the strategy resulting in better company

performance?

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Why Should Crafting and Executing Strategy

Be Top-Priority Management Tasks?

A compelling need exists for

managers to proactively

shape how a firm’s business

will be conducted

A strategy-focused firm is

more likely to be a strong

bottom-line performer

than one that views strategy

as secondary

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Good Strategy + Good Strategy Execution = Good Management

Crafting and executing strategy are core management functions

Among all things managers do, nothing affects a company’s ultimate success or failure more fundamentally than how well its management teamCharts a company’s direction,

Develops competitively effective strategic moves and business approaches, and

Pursues what needs to be done internally to produce good day-in/day-out strategy execution

Excellent execution of an excellent strategy is thebest test of managerial excellence – and the

most reliable recipe for winning in the marketplace!